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Tuesday, 26 April 2011

Go Long Material, Go Short Certified Idiots

Some relationships:

The last time the US dollar exceeded 120 on the dollar index (DXY) was in January 2002. Today it’s trading at 74.04, a 38% decline. Since January, 2002, gold has risen from $282 to $1,509 an ounce. Silver has risen from $4.30 to $47.36 an ounce. A barrel of crude oil (WTI) has risen from $20 to $112. A rising oil price increases the costs and prices of wheat, corn, gold, silver, shipping, and Internet searches.

Some other relationships:

Federal Reserve Chairman, Ben Bernanke, knows that his stock-market support operations are coming to an end, or a pause – time will tell. Propping up the stock market was an explicit objective of QE2. Quantitative Easing 2 (QE2), a process by which the New York Federal Reserve is buying $600 billion of US Treasury securities, is due to end in June. Classified as Permanent Open Market Operations (POMOs), the New York Fed dispatches about $6.5 to $8.5 billion into the banking system every day, as payment for 5- to 7-year Treasury notes. Chairman Bernanke wants the POMOs to continue, forever.

A few Federal Reserve Bank presidents have recently stated their reservations, in public. They warn that it is time to stop POMO-ing, QE-ing, or otherwise bankrupting America. (“Bankrupting” was not their description.) But Christina Romer, former chairperson of the “Council of Economic Advisors,” is “all in.” During a recent interview on Yahoo’s Daily Ticker, Romer gushed, “I think the evidence is that QE2 was very effective and certainly QE1 was very effective. I don’t understand why we’d be dialing back that tool.”

Central to her argument is that a lower dollar helps Americans. Since she worked so hard to emphasize this view on the Daily Ticker, we can be sure that: (1) Ben Bernanke is doing all that he can to lower the value of the dollar against other currencies, (2) jobs, wages, working hours, and production industries will continue to shrivel, and (3) tried-and-true asset relationships of the past decade (i.e. gold up, dollar down) will accelerate.

The Bureau of Labor Statistics (BLS) calculated the civilian population available to work was 216 million in January 2002. It was 239 million in December 2010, an increase of 23 million. Within this group, the BLS calculated 132 million were working in January 2002. In December 2010: 138 million, an increase of 6 million. Thus, the percentage of those with jobs among those who can work has dropped significantly. Those who do have jobs are worse off, in general, than they were in 2002.

The BLS calculated the weekly earnings of the average worker at $341 in January 2002. In December 2010, it was $342. This calculation is adjusted for inflation – but given the corruption of government inflation numbers, the latter figure ($342) should be reduced by at least 20%.

However, despite the overwhelming evidence that QE I and II have been dismal failures, Romer continues to applaud them as successes, just like Chairman Bernanke. The striking similarity between Romer’s perspective and Bernanke’s seems odd…until you examine their resumes.

We have, first, Christiana Romer, Class of 1957, Garff B. Wilson Professor of Economics at the University of California, Berkeley, former Chair of the President’s Council of Economic Advisers, former economics professor at Princeton University, current co-director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER),former member of the NBER’s Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received her Ph.D in economics from the Massachusetts Institute of Technology in 1985.

We have, second, Ben S. Bernanke, current chairman of the Federal Reserve Board, former Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs at Princeton University, former chair of the President’s Council of Economics Advisers, former Director of the Program in Monetary Economics at the National Bureau of Economic Research (NBER), former member of the NBER’s Business Cycle Dating Committee, a John Simon Guggenheim Memorial Foundation Fellowship recipient, who received his Ph.D in economics from the Massachusetts Institute of Technology in 1979.

Perhaps there’s a bit too much “in-breeding” in the gene pool of professional economists. Now some “highlights” from the Romer interview:

The Daily Ticker’s, Aaron Task: A lot of people say the Fed’s been very successful helping financial markets and helping people at the upper end of the income scale. There hasn’t been a translation into wage growth for the average worker or substantial hiring, so [how] would the Fed be doing more to help [if it continued to QE]?

ROMER: Noooooooo! If you look in fact at what quantitative easing does, it tends to lower the price of the dollar, both of those things that are good for ordinary families and lower long-term interest rates means firms can do investment. It means it’s easier for consumers to afford borrowing, so that tends to encourage spending and when people spend that puts the people back to work. A lower price of the dollar helps to make goods more competitive in foreign markets. If we’re exporting more, we need more workers to produce it.

TASK: Isn’t it true that long-term rates have risen since the Fed announced QE2 in August? And also, a lot of people think a “weaker dollar” means the dollar doesn’t go as far, when I go to the grocery store and when I put gas in my tank, or things of that nature. So, I think a lot of people think the weaker dollar is hurting them, not helping them

ROMER: So, you need to be very careful. It’s hard to evaluate what QE has done to long-term interest rates, because there were a lot of announcement effects. What I can tell you is that the academic studies that have looked at this absolutely say that QE does what we thought it was going to do.

And, of course, on the price of the dollar we’re not talking about what’s happening to your purchasing power here; we’re talking about what the price of the dollar is in the foreign exchange markets. I think that everyone agrees that a lower price of the dollar tends to make us export more, which ultimately causes unemployment to come down… There’s no evidence that what’s holding back business spending or consumer economy is government activism.

[Editor’s note: In 2010, David Farr, President, Chairman and CEO of Emerson Electric Corporation, in Chicago, told investors: “Why would any CEO invest one penny in the US? There is not one reason based on the new rules of the game.”]

Many brand-name professors and economists from the Romer/Bernanke gene pool also continue to cheer the “successes” of quantitative easing. Average Americans, not so much…

“Comments” by Yahoo! viewers responding to the Romer interview, featured widespread contempt for QE, and therefore for Romer’s perspective.

Comment #1 was from “Ross,” who asked, “Is this chick retarded or what?” Of viewers who expressed an opinion about Ross’ analysis, 227 liked his comment; 16 disliked it.

Comment #2 was from “Brian,” who queried: “Who knew it was so easy? Someone should go tell those poor nations in Africa that we’ve learned the secret: just produce more of your currency.” (Score: 182 to 11.)

Comment #3 was from “Kimmie Taylor” who observed: “QE1 has failed on jobs. QE2 has failed on jobs. The only success with these QEs are increased bank profits.” (253-18)

Comment #4 was from “Jack,” who stated one obvious problem and a fair conclusion: “The woman has never held a real job and knows nothing about the real world. She is a complete failure.”

There was not a single Romer defender as far as the eye could see. (The eye saw the first 20 reviews.)

We will finish with “PhilippeB” (#6), a fast learner: “No idea who she is, but it is now official: Christina Romer is a certified idiot.” (62-3)

What to do about it? Please refer to the very top: “Some relationships.”